The purpose of this paper is to investigate the impact of loan officers’ overconfidence on risk-taking decision and solvency performance measured by z-scores in the context of Islamic and conventional microfinance institutions (MFIs).
A random effect generalized least square regression was applied to examine the effect of overconfidence on credit risk-taking. The data set covers 326 conventional MFIs and 57 Islamic MFIs in six different regions over the period of 2005–2015.
Overconfidence proxies have shown through high loan growth, low-interest margin and loan loss provision reveal negative consequences on risk-exposures for both MFIs averagely. The loan officer’s overconfidence is significantly and positively related to the risk-taking decision, and thus, a lower loan portfolio quality. Besides, loan officers’ risk-taking behaviour harms these institutions’ solvency performance.
This paper makes an initial attempt to evaluate the effect of overconfidence behavioural bias on risk-taking decisions and its implication on the MFIs solvency and sustainability.
The authors would like to thank the editor and the anonymous reviewers for their useful comments and suggestions.
Fersi, M. and Boujelbène, M. (2022), "Overconfidence and credit risk-taking in microfinance institutions: a cross-regional analysis", International Journal of Organizational Analysis, Vol. 30 No. 6, pp. 1672-1693. https://doi.org/10.1108/IJOA-11-2020-2510
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